Mudharabah

Published Date: 02 Nov 2017

MUDHARABAH

The term "Mudharabah" derived from al-darb fi al-ard where the meaning of this word has been used in the Quran. For example, Allah says (al-Muzammil: 20) "...others travelling through the land seeking Allah's bounty." Therefore, it is obvious that the word dharabah is being used in the verse to show that travelling from places to places, seeking for Allah's bounty.

Mudharabah refers to a profit-sharing contract between the owner of capital and entrepreneur. The owner of capital provides 100 percent capital for the entrepreneur and the entrepreneur (the mudarib) provides expertise of investing the capital, managing the investment and also providing labour. Both of them share the profit in a pre-agreed ratio and any losses will be borne by the owner of capital, who does not have control over the project's management.

There are several definitions of this word, Mudharabah. Firstly, the Malikis define it as an agency for trading in delivered cash for a part of profits. Next, the Shafi'is defined it as an agreement where an owner provides capital to a worker who trades with it and the profit is being shared between them. The Hanbalis defined it as a contract which a person gives his capital to another for business in order to share the profit according to the proportion agreed upon earlier. Lastly, the Hanafi School of Law defined Mudharabah as a partnership for participation in profit which capital is provided from one side whereas labour or skill ('amal) is from the other side.

There are even current definitions from the contemporary jurists. For example, Ali al-Khafif defines Mudharabah as a contract for sharing profit of a business which one party contributes with capital and other with his labour. Another jurist, Ali Khan Niyazi defines it as a form of partnership where one of the contracting parties, known as sahib al-mal (the financier) provides a specified amount of capital, while the other party, called the mudarib, provides the mudaribship and management for carrying on any venture, trade, industry or service with the objective of earning profit. Besides that, the Majallah (Art. 1404) defines Mudharabah as "a type of partnership where one party supplies the capital and the other supplies the labour. The person who owns the capital is called the owner of the capital (Rabu Al Mal) and the person who performs the work is called the workman (Mudarib)". However, in Bidayat al-Mujtahid, Ibn Rusd defines it as "when a party gives his property to another for the purpose of trading, and if the venture generates profit, the mudarib will share his percentage of profit in accordance with their agreement, one-third, or one-fourth or one-fifth".

There are several conditions of Mudharabah to be complied. Firstly, there must be a legal capacity of the parties involved. The rab al-mal must be competent to appoint an agent and the mudarib must be competent to accept agency. They must be competent in terms of age of majority and mental capabilities. The second condition is the capital provided must be in cash which it can serve as the capital of mudharabah. Therefore, there are certain properties which are not suitable to function as capital, for instance, merchandise. Merchandise and immovable property cannot serve as the capital of mudharabah as people argued that capital in the form of commodity will lead to uncertainty (gharar). However, Ibn Abi Layla and al-Awza'I allowed the use of non-monetary properties as capital where the mechanism of valuation for these properties is based on the prevailing market price.

Thirdly, the capital must present during the conclusion of the contract. Therefore, it is not permitted if the capital in mudharabah is debt owed by the mudarib or another party. This is because it is not considered as an existing asset at the conclusion of the contract. However, if the rab al-mal instructs the mudarib to collect his debt from the third party and use it as capital in their mudharabah, then the contract is valid, provided the debt is due (dayn hal) and is ready for collection.

Besides that, the existing capital must be delivered to the mudarib who supplies the labour and the rab al-mal should not have any control over the capital but may have supervision over the management of the venture. Next, the capital must be known and certain where it must be specific in terms of quantity and quality to avoid any possibility of uncertainty or ambiguity. The mechanism for distribution of the profit must also be clear and known to both parties to avoid any possibility of uncertainty and dispute.

Furthermore, the shares of profit for each party must be determined as a percentage and not as a specific and fixed figure. For example, it should be one-half or one-third and not a fixed figure like RM3,000.

Mudharabah contract is a profit sharing contract between the entrepreneur and the capital provider. Mudharabah contract is applied in deposit taking arrangement such as current account, savings account and investment account. The contract is also applied in inter-bank investment and Islamic bonds. In takaful industry, mudharabah contract is used as one of the operational model as well as being applied for investing the takaful funds.